Following is the interview of the Permanent Secretary of SELA, Ambassador Carlos Moneta, by Ms. Estrella Gutiérrez, Director of the IPS international news agency in Venezuela

Caracas, 3 September (IPS).- Crises hitting with growing frequency coupled with repercussions of an increasingly global reach clearly signal that the problem is rooted in the international financial system itself. The system’s reform is the only true way out. These were the comments made by the Permanent Secretary of the Latin American Economic System (SELA), Carlos Moneta on this issue.

This phenomenon rapidly became known as the "butterfly effect", thus substituting all previous metaphoric allusions to liquor and spirits with this more poetic image, and on Thursday and Friday, in Washington D.C., Ministers of the Economy of eight Latin American countries together with International Monetary Fund authorities will be working to find ways to prepare for the butterfly’s unpredictable flight path.

"A systemic crisis has embedded itself into the international financial system and no one is ready to publicly admit it. No real solution has been found; attempts made thus far are but remedies that treat only a few symptoms at a time, unable to attack the entire malady which calls for in-depth restructuring," said Moneta to IPS at an interview at SELA headquarters in Caracas.

This official of Argentine nationality went on to declare: "What is going on in the different regions should impel us to carry out a systemic analysis because clearly, each of these crises has particularities, yet all the while a recognizable and repetitive pattern is observed."

The economies of Latin America are being whipped these weeks by both the Asian and the Russian crisis but are nonetheless "holding up quite well" as a result of the well-conceived reform carried out in 1994 in its financial sector and its willingness to adopt the measures needed to deal with any eventuality.

"In a fraction of a second, colossal sums are transacted and we must remember that central bank reserves are limited, " commented Moneta. In other words, "it is like defending a fort with twenty soldiers when your assailants number 10,000."

The figures circulating since mid-August indicate that the total movement in one week’s time accounts for as much as the entire globe’s gross product for one quarter.

Moneta is of the opinion that current financial processes must be viewed in the broader framework of globalization, being that it is this sector that "has made the most important progress in terms of globalization."

The system’s deregulation to facilitate movement of capital (considered fundamental for the prevailing economic vision for the attainment of growth and development) has led to investment flows towards the financial sector that are far from rivaled by any other sector.

Moneta went on to point out that investments of a constructive nature were attracted but so were those of a more speculative kind, and banking systems of the developing countries of the South are not sufficiently prepared to deal with this latter group.

An abrupt deregulation set into motion in the context of a weak banking systems and capital markets of limited development can lead to situations requiring countries to finance their growth with large amounts of foreign capital, some of which can be volatile to some extent.

Crisis spans have been shortened by this new framework. Europe and Latin America were hard hit by a big crisis in the 80s followed by yet another in the USA. At the end of 1994, Mexico succumbed to a severe financial collapse, and three years later, trouble sprouted in Asia. The crisis in Russia set in while the pains started by the Asian crisis are far from being dulled.

In pointing out that the roll of such a wave affects both the developing and industrialized world alike, Moneta explained: "Crises have become less frequent and the impact continues to gain force because of the inter-related nature of the system."

The Asian crisis sparked in July 1997 was a good indication of the imperfect nature of the system and its enormous contagion potential, "evidencing that the actors involved are having problems in the realm of information, transparency and analysis of phenomena."

Russian vicissitudes turned for the worse in August, demonstrating just how far mistrust can be sown vis-a-vis all emerging markets of the developing South, allowing no room for differentiation between the strong and the weak nor bearing in mind whether the economies are in any way connected with the origin of the crisis.

Crises are then passed on indirectly by investors, some investors at that, who adopt an attitude that is "not well reasoned and specific" and who act in defense of their interests: if a developing region or country is faced with problems these investors quickly set flight from all the emerging venues.

According to Moneta: "It is a type of generalization that is very fast and acritical; there is no logic to Latin America being hard hit by events in Russia when there is no link between the two. The Asian case is another story because Latin America and Asia do have ties but with Russia there are none."

Moneta deems that "all these shock waves embody an element that has not been awarded sufficient credit, namely perception.

According to Moneta, "Risk qualification companies and other entities are simply performing their technical tasks. But an added note of panic is ever-present; even when the technical criteria exists for a certain qualification, it seems more driven by emotion, fear, images of disaster, than on providing a faithful image of reality."

This seemingly technical game, which is further burdened by factors that have no bearing on technical matters, ends up with governments getting all the blame when in fact it is not altogether responsible. Take the case of Asia, for example. There the figures are proof that the guilty party was the private sector and the State’s wrongdoing was limited to its inefficiency in terms of controlling the effects.

Another trait of these crises is that adequate policy and macroeconomic contexts cannot shield economies from effects because the market has the force to swiftly and deeply change the face of these economic realities.

"Government has indeed handed over its power to the markets and consequently, the State is unable to control and reign in these situations," summarized Moneta. Add to this the fact that high volatility levels are not determined by a country’s risk factors but have become entirely emotional and psychological variables.

Moreover, risk agencies as well as other supervisory bodies do occasionally devise superficial and disassociated ways of grasping the events sweeping the globe.

One might expect that multilateral organizations provide the leverage required to level situations. But it is important to understand that these organizations are not prepared for such a task and were not, in fact, designed for this purpose. What they do in the end is to impose mechanical formulas that generally need to be revised, adding a further burden on the already heavily ridden social costs of afflicted countries.

Another factor indicative of these crises’ shock waves is that capital flight is an immediate reaction while the regaining of confidence and the return of investment flows is a slow one, characterized by a catch-22 where recovery depends on procuring these very financial flows.

"Financial support comes only after the attack has been launched, never before", indicated the top official of this 28-country organization.

Another element is that the financial system was designed for the investors’ protection "but when the problem has already dawned on a country it is passed on to the society who ends up paying the highest price for the damage", warned Moneta.

The regional expert on globalization phenomena went on to note: "The absence of participation by those involved in the mechanisms that are meant to manage the financial system has created a vacuum."

For Moneta the waves of the crisis crash on a single shore, which suggests that a shift be made to thinking "without fear but with prudence" in a reform of a global financial system that encompasses supervision of capital, rules for the granting of credits, and procedures to apply when bankruptcy sets in."

Countless formulas have been proposed. What is important though is to "find a way to contain the rippling of the waves because if this situation endures with no supervisory body in control, the risks will continue to grow, because it has already been seen to affect even the markets of the North and that the harshness of the impact knows no end."

Moneta concluded saying: "The longer we wait, the more bitter the taste will be. No one can deny that brutal interests are at play but unless a final decision is taken we will continue to live depending on firefighters and the results obtained will of course remain limited.